Muslims are entering the frame of the fintech boom in Southeast Asia
It was founded in 2014, Blossom Finance originally intended for Muslim businessmen in the United States. The microfinance platform connects investors with small businesses using mudarabah, a sharia-compliant profit-sharing arrangement. But founder Matthew Joseph Martin soon realized that the startup, backed by investors like Boost VC and Tim Draper, was serving a relatively niche market in the US. So he began researching markets with large Muslim populations. Indonesia emerged as the best choice.
Southeast Asia is already home to a thriving fintech scene, where Grab, Transition and Sea have built super apps that include financial services and startups like Xendit, Listen up and Dana (για να αναφέρουμε μερικά) έχουν συγκεντρώσει εκατοντάδες εκατομμύρια δολάρια για πληρωμές, τραπεζικές υπηρεσίες και άλλα χρηματοπιστωτικά εργαλεία. Η Ινδονησία και η Malaysia, στην καρδιά της Νοτιοανατολικής Ασίας, είναι μεταξύ των χωρών με τους μεγαλύτερους μουσουλμανικούς πληθυσμούς στον κόσμο.
These factors are proving to be fertile ground for the creation and development of fintechs that focus exclusively on Islamic finance, offering products and services that follow sharia law. Among other things, this prohibits the accumulation of interest, speculation and the financing of non-halal products such as pork, tobacco and alcohol.
In accordance with The World BankIndonesia has the most Islamic fintech companies in the world – perhaps fitting given that it is also the most populous Muslim-majority country in the world with around 231 million Muslims.
Some notable Islamic fintech companies include peer-to-peer lending platform and digital bank Hijra (formerly known as Alami), online bank Aladin Bank, LinkAja, which is backed by Telkomsel and Bank Mandri, the largest bank in Indonesia in terms of asset loans and deposits.
Gojek's GoPay is also working with the Indonesian Council of Mosques to allow users to make zakat, or compulsory almsgiving, online.
Meanwhile, in Malaysia, where 61,3% of its 33,6 million people practice Islam, fintech companies focusing on Islamic finance include crowdfunding platform Ethis Ventures, P2P lending platform MicroLAP PLT and investment platform Wahed , which is the only robo-advisory platform in the country. Funding Societies, the SoftBank Vision Fund II-backed SME digital lending platform, recently launched a sharia-compliant financing product there and now offers it as a default product to all Malaysian customers.
Sharia law requires a different approach to financial services, and conventional banks are also launching products for Muslim customers. Along with the growing number of Islamic fintech startups digitizing the process, Islamic compliant services are becoming accessible to more people.
Profit sharing instead of debt
The seed of Blossom Finance was planted when Martin was running a project in the US allowing people to buy Bitcoin. He faced a receivables problem and the usual way of financing cash receivables is to obtain credit or receivables financing from a bank. As a devout Muslim, however, Martin could not use conventional loans. But he also couldn't find any other options in the US.
"Quite naively, I thought there are a lot of Muslims who have businesses, surely they face the same problem," he said. "They have to have a solution. So what is the solution?”
After learning more about the principles of Islamic finance, Martin launched Blossom Finance, a platform that connects investors with micro-banks, which in turn disburse Sharia-compliant finance to micro-businesses. Headquartered in Delaware, Blossom Finance hosts investors mainly from the United States and Europe, but all of the micro-businesses it serves are located in Indonesia.
After an initial soft launch in the US, the Blossom Finance team realized the market there for Islamic finance was very small, Martin said. They started looking for a bigger market and landed in Indonesia because of the financial inclusion challenges faced by micro and small businesses.
Other reasons why Blossom Finance chose Indonesia over other countries with large Muslim populations included its relative political stability, Martin said. It also has a strong core infrastructure for operating businesses with mostly foreign capital.
"There have already been in the last two decades before we got to tons of amazing work," Markassiteros said. “A lot of the foundations were already there and we were able to come in and act as a link where there are inefficiencies and a lack of funds. We were able to bridge this lack of capital by using a technological solution. All of this underlying infrastructure for the last mile of serving small businesses was already there and we were able to leverage it."
Investors on Blossom Finance's platform pool their money into funds or cooperatives, which are then managed by microbanks. Microbanks disburse financing to microbusinesses to purchase inventory and other things they need. All losses and gains are shared pro rata, Martin explained. If an investor's capital is 1% of a mutual fund, he can expect to receive 1% of his profits or absorb losses at the same rate.
What makes Blossom Finance's microfinance platform sharia-compliant is the use of murabaha contracts instead of traditional interest-charging loans. For example, when a small business such as a corner store needs to buy inventory such as drinks or snacks, it goes to one of the cooperatives for financing. Martin explains that the basis of financing is not the capital, but the commodity to be purchased. The cooperative buys it at wholesale prices and provides it to the business at a markup instead of charging interest. They then share the profit with the investors. Martin said co-ops can often connect micro-businesses with wholesalers they didn't know before and also take advantage of economies of scale, which also help micro-businesses.
Cooperatives do not set prices, and instead mudarabah agreements are based on current market prices, which micro-enterprises agree on. To ensure micro businesses get fair deals from micro banks, the cost of financing for micro businesses is one of the things Blossom Finance takes into account when deciding whether to work with a co-op/micro bank.
“Let's say you're the bank and I want to buy chickens. You agree to buy me 100 chickens. Let's say it costs $1,000. We'll agree that your profit will be 20%, so I have to pay you $1.200 over, say, 12 months. So you as a funder get that 20% profit,” said Martin.
The advantage of working with cooperatives instead of commercial banks is that they provide more flexible payment terms and duration of financing, which is useful if a business is experiencing financial difficulties, Martin added.
Martin said there is debate among Islamic scholars about whether profit sharing is inherently better than debt. But, he asks, “if justice and debt are equal, why did the Prophet Muhammad pray for protection from debt? I think we all inherently know the answer to this question because debt can trap the poor in a cycle of poverty from which they cannot escape. Equity, on the other hand, includes the concept of participation in risk. Investors hope that they will have a better upside, and the reason they will have that better upside is because they are participating equally with the entrepreneur in terms of risk.”
Promoting financial inclusion
A Report 2022 by research firm DinarStandard and fintech Ellipses estimates that the size of the Islamic fintech market in the Organization of Islamic Coordination (OIC) countries was $79 billion in 2021, accounting for 0,83% of the global fintech transaction volume. While the size of the Islamic fintech market is still small, it is expected to reach $179 billion at a CAGR of 17,9% by 2026, surpassing the 13,5% CAGR growth of traditional fintech over the same period.
DinarStandard and Ellipses also found that there are 375 Islamic fintech companies worldwide. Most are in the P2P financing space, and Indonesia is one of the top markets in transaction volume.
Islamic fintech startups in Malaysia and Indonesia have the support of government policies. For example, Indonesia's National Islamic Finance Commission focuses on developing the country's Islamic finance and Islamic economy.
And in Malaysia, Bank Negara's investment account platform is the first Islamic P2P initiative established by a central bank, while the state-owned Malaysia Digital Economy Corporation connects investors with halal business owners. In 2019, the Malaysian government also issued the Shared Prosperity Vision 2030, a 10-year framework for restructuring its economy, which includes building an Islamic fintech hub as a key part of its strategy.
The World Bank has said the development of Islamic fintech can promote financial inclusion giving unbanked people access to financial services.
For example, one group of people it can reach are those who avoid bank accounts because their terms are not sharia-compliant and want usury-free financial transactions based on risk sharing. Islamic fintech can also help solve issues faced by the unbanked, such as lack of money, lack of proper documentation, and location away from conventional Islamic banks.
Golden Gate Ventures partner Justin Hall, an investor in Hijra and Funding Societies, believes Islamic fintech is making Islamic financial services accessible to more people.
"Islamic banks are extremely conservative, not only in how they operate, but also in the cost of funding, who they can lend to, etc.," he said. "Having companies that are differentiating from that and providing a nice consumer experience on the digital banking side, but in the context of an Islamic bank, there's an opportunity there."
The World Bank also reports that Islamic microfinance, or short-term financing with terms of less than 12 months, can play an important role in alleviating poverty in OIC countries, as they work with clients who are often underserved by traditional banks.
An example of a fintech company creating sharia-compliant products for underserved clients is Funding Societies, which is based in Singapore with operations in Indonesia, Malaysia and Thailand.
Kien Poon Chai, his country manager Finance companies Malaysia, said the sharia-compliant financing product was launched in 2022 to serve relatively new micro and small businesses, which are typically overlooked by banks when looking for working capital.
Chai said the push to launch sharia-compliant financial products is because Malaysia has a large Muslim population and the company is seeing demand from lenders and SMEs looking for financial products in line with their faith.
Financing companies guarantee the Sharia-compliant financing product in the same way as conventional financing bonds, but there are many nuances that they need to pay special attention to. For example, funding cannot be used for non-halal businesses, including those selling alcohol, pork, tobacco or massage parlors.
Financial offers must also be backed by underlying assets, so for every disbursement that finance companies make through the sharia-compliant product, they must purchase underlying commodities through exchanges.
Fee disclosures and charges must also be sharia compliant. There can be no uncertainty in financial products, so all fees and charges must be clearly defined and described. For example, penalizing individuals for early repayment with prepayment fees is prohibited.
Peer-to-peer lending without interest
Another Islamic startup focused on financial inclusion is P2P lending platform and neobank Hijra. Founded in 2018, Hijra has raised $30 million in equity from investors including Quona Capital, Golden Gate Ventures and EV Growth. It initially started as an aggregator of traditional Islamic banks serving SMEs, but co-founder and CEO Dima Djani told TechCrunch that after about 9 months, the team realized that the Islamic banking industry in Indonesia could not keep up with fintech growth.
As a result, Hijra received a license from the Indonesian Financial Services Authority (OJK) in 2019 to operate as a digital lending platform. Then retail lenders started asking for more integrated financial services, so Hijra, then known as Alami (which is still the name of the P2P lending platform) acquired a small Islamic bank last year and launched a new digital bank with savings accounts and money transfers.
The main reason why Djani wanted to start an Islamic finance platform is because Indonesia has one of the largest Muslim populations in the world, but the penetration of Islamic finance was still very low, around 6% to 7% of total banking assets. figures, compared to around 30% penetration in Malaysia. Djani attributes this to low consumer awareness of Islamic finance, but says a new wave of religious teachers, who are gaining a following on social media, has sparked a strong Halal economy over the past 10 years and also spurred interest among millennial and Gen Z Muslims to adopt services tailored to their faith.
Στην Ινδονησία, οι κατευθυντήριες γραμμές για την ισλαμική χρηματοδότηση καθορίζονται από τρεις αρχές, δήλωσε ο ερευνητής Fahmi Ali Hadaefi. Αυτές είναι η Αρχή Χρηματοπιστωτικών Υπηρεσιών (OJK), η οποία ρυθμίζει και εποπτεύει τον τομέα των χρηματοπιστωτικών υπηρεσιών, η Bank Indonesia, η οποία επιβλέπει τις τράπεζες, και το Majelis Ulama Indonesia (Εθνικό Συμβούλιο της Σαρία-MUI), ή η κορυφαία ισλαμική σχολή της χώραςars body.
The MUI has issued at least two fatwas on financial technology. The first, issued in 2017, concerns Islamic perspectives on practices related to electronic money. The second, which was published a year later with the Financial Services Authority, covers Islamic fundamentals for P2P lending.
Δεδομένου ότι οι μουσουλμάνοι απαγορεύεται να πραγματοποιούν έντοκες συναλλαγές, η ομάδα της Hijra ήθελε να παράσχει μια εναλλακτική λύση για τους χρήστες που χρειάζονται χρηματοδότηση κεφαλαίου κίνησης. Όπως και η Blossom Finance, χρησιμοποιεί ένα model κατανομής κερδών για να αποφύγει το ενδιαφέρον.
The way it handles P2P loans between lenders and farmers is one example. When a fish farmer needs to buy feed, he does not take out a loan with interest from a lender. Instead, their lender buys fish feed and sells it at a profit to the farmer, with markups based on current market prices. Instead of paying for the feed immediately, farmers pay for it after the fish are harvested in about three to four months.
Islamic finance aims to create a transparent and fair financial service for all,” said Djani. “For example, we see interest or usury as an unfair tool for its mechanisms. In addition, we also consider speculation and gambling to be unfair as they do not correspond to effort and pay off evenly.'
Hijra's digital banking app, which it was able to launch after acquiring the small Islamic bank in Jakarta, doesn't give depositors any returns at the moment, but also doesn't charge them fees. In the future, Hijra plans to launch more sharia-compliant financial solutions such as rent-to-own, payments and community-driven savings for groups of people who share a common goal, such as saving for a trip to Mecca.
Create a halal payment gateway
Another example of a company founded to get more Muslims involved in digital financial services is PayHalal, which was created to provide a sharia-compliant online payment gateway.
Co-founder Pat Salam Thevarajah told TechCrunch that he and his fellow PayHalal co-founders realized in 2016 that if they wanted to get more people in the Muslim community to adopt online payments, they would have to build their entire technology stack from scratch, rather than they go to a white label provider like Ayden. Thevarajah stated that 55% of the Malaysian population is unbanked mainly because they are afraid of riba or interest.
“We created it because of the sheer need to create end-to-end transaction compliance. This is how PayHalal came about. The primary objective is to keep payment free of riba and gharar, or speculation, so that Muslims are able to carry out in-person online payments or e-commerce without any form of non-compliance.
One of PayHalal's goals is to create a network like Visa or Mastercard that remains true to Islamic finance principles. A key difference is the lack of interest.
Conventional payment gateways treat money as a commodity, meaning it can be sold at a price higher than face value or borrowed at interest. PayHalal does not treat money as a commodity, but only uses it to buy goods and services and makes a profit from trading goods or services. PayHalal ensures its services are sharia compliant with the help of two team members, scholar Dr Daud Bakar and co-founder Indrawathi Selvarajah, who was a corporate lawyer before becoming a sharia fintech expert.
Currently, when an instrument originates from a conventional financial institution, PayHalal feeds it into its non-AI-based compliance checker. The tool then suggests treatment based on the amount of the non-compliance factor, and PayHalal says it takes the fee it earns from the transaction, writes it off and contributes it to social work, such as feeding poor people or building mosques, as part of a process called cleaning.
Thevarajah said the process is auditable because Islamic financial institutions have internal sharia compliance departments, which in turn undergo regular audits by external sharia supervisory boards. The process of identifying non-compliant transactions, writing off profits and donations is documented and checked for accuracy by internal and external auditors.
Ορισμένα παραδείγματα μη συμμορφούμενων συναλλαγών της σαρία περιλαμβάνουν αυτά που περιλαμβάνουν την πώληση απαγορευμένων αντικειμένων όπως το αλκοόλ, ο καπνός και το χοιρινό meat. Οι συναλλαγές που περιλαμβάνουν riba ή gharar θεωρούνται επίσης μη συμμορφούμενες και αυτές μπορεί να περιλαμβάνουν τόκους υπερημερίας ή αβέβαιους όρους που χρησιμοποιούνται σε συμβάσεις πώλησης.
"There is no guarantee that we can keep the riba away unless it is a closed-loop Islamic transaction," Thevarajah said. "If there's an open-loop transaction, then we're obligated to clean up."
Cases of non-compliant transactions it tries to avoid include the exchange of goods for consumption that are not made with halal ingredients. Another is in cases of salaam contracts, where a buyer pays immediately for something to be delivered later. When this type of transaction is handled by PayHalal, it mitigates chargebacks by ensuring that customers receive their products at the agreed time.
"Transparency is fundamental with Islamic transactions," said Thevarajah.
One of PayHalal's goals is to create a super app with different sharia-compliant financial services, such as insurance products and savings accounts for Mecca pilgrimages. It recently took a step towards expanding its product portfolio by launching a Sharia-compliant buy-now-pay-later service with Atome. The BNPL plan is interest free and has no annual fees and service charges. It currently integrates merchants offering halal and sharia compliant services and products.
Thevarajah explains that if a customer defaults beyond the three-month loan term, PayHalal cannot charge interest. Instead, he must guarantee the entire transaction. "Our contract with the merchant will be active participation where we buy the product and resell it to the consumer for a fee," he said, adding, "The contract changes the whole structure of how an Islamic market works now, pay later."
Thevarajah added that the transactions are structured as deferred payment sales, which means that PayHalal, acting as a seller, buys the product for a supplier and then sells it to a customer for a profit. The customer pays the total price of the product in installments over a predetermined period of time. The transaction is asset-backed, which means it is secured against the product being sold and not against the creditworthiness of the buyer.
Still early days
The rise of Islamic fintech in markets such as Indonesia and Malaysia is linked to the growth of Islamic finance in Southeast Asia. According to a S&P report published last yearSoutheast Asia's $290 billion Islamic banking market is expected to continue growing at a CAGR of around 8%. In Malaysia, Islamic banks will account for 45% of the total commercial banking loan portfolio by the end of 2025, and in Indonesia, Islamic finance's market share is expected to grow to 10% by the end of 2026, at a faster rate than conventional banks.
However, Islamic fintech is still a very small percentage of the overall market. As mentioned earlier, DinarStandard and Ellipses estimate the size of the Islamic fintech market in the OIC countries to be $79 billion in 2021, or just 0.83% of the global fintech transaction volume. But that's not stopping Hijra from making international expansion plans – the group already has its sights set on Malaysia, Turkey and Saudi Arabia.
Golden Gate's Justin Hall, also an investor in Hijra and Funding Societies, believes Indonesia is uniquely positioned to be a launch pad for Islamic banks to expand into other markets around the world.
“Indonesia is the only country today that has a mix of entities that understand Islamic banking, as well as serial entrepreneurs, institutional LPs that are willing to capitalize on companies that do this, and a very, very large domestic market. It's very rare to find a model unique to Southeast Asia that can go global, and in fact I don't know of any other than Islamic fintech.”
As Muslim fintechs create a more inclusive market landscape for Muslim users, they are also working on their own inclusion issues, such as attracting more women to the fintech business sector.
Djani said the percentage of women working in Muslim fintech is still comparatively low, although some have promoted women to leadership roles, including Hijra's CFO Febriny Rimenta.
One of PayHalal's co-founders, Selvarajah, is a woman, and Thevarajah said Muslim fintech startups can take several steps to attract more women into the space, including building a gender-inclusive workplace based on Islamic values , providing flexible working arrangements, mentoring and promoting transparency to build trust with female employees.
She added that Muslim fintech startups can design products, including savings and investment platforms, to increase women's economic empowerment.
Martin said the cooperatives Blossom Finance works with have a high representation of women, with one staffed entirely by women.
Obstacles also exist in other aspects of space. On the fundraising front, Martin said one of the main hurdles he faced in the US was investor education.
“First you have to explain what Islam says and why this is a problem, then explain your situation. So that was a challenge. However, I would say that for the VCs who were able to connect the dots and understand that it was a real problem – there were some who said, okay, maybe this is too niche and they passed – but for those who were able to take the time to understand the problem, we faced no obstacles.
Perhaps surprisingly, the biggest pushback he received was from other Muslims.
«Εκεί που αντιμετωπίσαμε εμπόδια ήταν μέσα στους μουσουλμάνους που ζούσαν ως μειονότητα στην Αμερική. Απώθησαν: «γιατί το αποκαλείς αυτό μουσουλμάνο; Γιατί εστιάζετε στο Ισλάμ;”», είπε. “Πολύ ενδιαφέρον, οι επενδυτές venture capital [who did back us] ήταν σαν, αυτό έχει νόημα. Αυτή είναι μια σημαντική θέση. Νομίζω ότι αυτό πηγαίνει πίσω στο να είσαι μειοψηφία και μετά την 9/11, και να είσαι αμυντικός. Υπάρχει αυτή η αντίσταση έναντι της μετάβασης σε μια μουσουλμανική πλειοψηφία [market], όπου είναι σαν “καλά φυσικά κάνετε μουσουλμανική χρηματοδότηση, γιατί να μην το κάνετε;”
For Islamic fintechs, finding investors can also mean doing their own due diligence.
PayHalal, which has received $4,5 million in seed funding from Asad Capital, Q Cap, Effective Shields and Crescent Capital, is now in the process of raising a $5 million Series A round at a $33,5 million valuation. Thevarajah said part of fundraising means vetting potential investors to ensure that both they and their funds are managed in accordance with sharia principles.
"Investor interest in the Islamic fintech sector for PayHalal has been very high due to its potential in a rapidly growing Muslim population worldwide," said Thevarajah. "While some investors saw this as a captive market due to the religious beliefs of the Muslim community regarding halal food and transactions, we still had to ensure that potential investors fell into the right category for Islamic financial services."
Founders in countries with large Muslim populations say they also had to educate investors, but that is changing. The $30 million Hijra has raised in equity so far has almost all come from non-Muslim countries. Djani said several of her investors already had a strong interest in Islamic financial services because it is a growing niche that is able to offer diversification to fintech players.
"We will need to do education about what we offer, but dramatically less so in recent years as Islamic finance has become more mainstream and widely accepted in Muslim-majority countries such as Indonesia," he said.